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Shale Gas Could Fracture Energy Market

By James Herron

Reuters

Significant growth in the development of shale gas resources could shift the balance of power in the global energy market, reducing the fuel import bills of places like Europe and weakening powerful exporters like Russia and Qatar, the International Energy Agency said Tuesday.

Now, this would be a boon for energy intensive manufacturers in Europe–particularly petrochemical producers–and also for utilities currently suffering at the hands of the gas pricing power enjoyed by Russia.

“It is not an exaggeration to say that unconventional gas would fracture the status quo of the energy system and lead to a major geographic shift in the sources of energy,” said the IEA’s Chief Economist, Fatih Birol, at a briefing in London.

However, if the nascent global shale gas industry does not do more to address environmental concerns about its activities, public opposition could stop it in its tracks, the IEA warned. In this case, the power of the dominant exporters would only grow.

If the world embraces a technology called hydraulic fracturing to release huge resources of natural gas trapped in shale rock formations, natural gas could become the fastest growing energy source out to 2035, the IEA said in a report Tuesday. Supply could grow by 55% over that period, with much of the new gas output coming from countries that are not currently exporters of the fuel.

“Importers will benefit in two ways,” said Mr. Birol. First, prices will be lower with shale gas than without. In Europe, natural gas prices will be 9% lower in 2020 and 18% lower in 2035 than they would otherwise have been without shale gas, the IEA said.

The benefits of such a change are already being felt in the U.S., where a boom in shale gas production has pushed the natural gas price to 10-year lows.

“This is a major factor in the beginnings of a resurgence in domestic manufacturing,” said Bob McCutcheon, U.S. industrial products leader at consultancy PricewaterhouseCoopers. Producers of chemicals and metals are seeing particular benefits, he said.

Mr. Birol said the second big benefit is that countries will import less gas because they are producing more at home, dramatically improving their balance of payments.

The IEA forecasts that in 2035, the EU’s annual natural gas import bill will be around $65 billion lower if there is a boom in shale gas production, compared with the current status quo. China’s saving on imports would be $90 billion and the U.S. and Canada would gain $35 billion by switching from being an importer to an exporter, it estimated.

Lower imports will come largely at the expense of the current established gas exporters. By 2035, gas exports from Russia and the Middle East will both be around a third lower than they would otherwise have been, the IEA estimated.

This reduction in market share would weaken these countries’ ability to fix the price of their gas to a price formula related to the cost of oil, Mr. Birol said. This could be to the advantage of European utilities like Germany’s RWE AG or E.ON AG, who have recently suffered big losses because they have been forced to buy gas from Russia at much higher prices than it is available elsewhere.

However, if the shale gas industry fails to get off the ground due to growing public opposition, the dominance of existing exporters would only grow, to the detriment of consumers. “The share of Russia and the Middle East…would be approaching 50% of international trade,” said Mr. Birol.

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